In Absence of Direct Business Relationship, Customers Cannot Arraign a Corporation as a Defendant

In this action, while granting the defendants’ motion to dismiss for lack of subject matter jurisdiction, a district court in New York found that in absence of direct business relationship, customers cannot arraign a corporation as a defendant.

In this case, the plaintiffs brought a putative class action in federal court against two energy providers, Gateway Energy Services Corporation and Direct Energy Services, LLC, alleging that they were misled into contracting with Gateway for energy services by certain false promises.

The defendants moved to dismiss arguing that the District Court lacked subject matter jurisdiction over the plaintiffs’ claims, which the District Court granted.

At the outset, the District Court noted that in order to join a defendant in an action, some plaintiff must have a claim against that defendant. Here, the District Court found that no plaintiff asserted that he or she had directly contracted for services with Direct Energy, or that he or she was injured by actions of Direct Energy. The Court further found that the alleged injurious misrepresentations were all made by Direct Energy’s affiliated entity, Gateway.

The plaintiffs argued that Gateway served as an “alter ego” of Direct Energy, since Direct Energy acquired Gateway. The District Court, however, found that there was no allegation in this case that Direct Energy was the contracting entity; that it made any of the alleged misrepresentations; that it directed Gateway to make the alleged misrepresentations; or somehow used its domination and control of Gateway to make or facilitate the misrepresentations. The Court further found that the allegations that Direct Energy dominated Gateway fell short of asserting that Direct Energy injured the plaintiffs in any way. In its analysis, the Court noted that clear precedent in Second Circuit holds that plaintiffs may not bring class actions against non-injurious defendants, even when they are affiliates of one another. Thus, the Court concluded that Direct Energy must be dismissed as a defendant from this case.

Next, the District Court turned to the question of whether it had subject matter jurisdiction over the claims against the one remaining defendant, Gateway. The plaintiffs asserted CAFA as the sole basis for jurisdiction. The District Court found that CAFA’s mandatory exceptions under 28 U.S.C. § 1332(d)(4)(A)-(B) applied to the instant case. In doing so, the Court explained that the mandatory exclusions are triggered, respectively, when: (1) greater than two-thirds of all proposed plaintiffs and at least one defendant (from whom “significant relief” is sought and whose “alleged conduct forms a significant basis” for the claims at issue) are citizens of the State in which the action was filed and “principal injuries resulting from the alleged conduct” occurred in that State; and (2) greater than two-thirds of all proposed plaintiffs and the “primary defendants” are citizens of the State in which the action was filed.

The District Court found that more than two-thirds of the proposed plaintiff class were residents of New York State, the same state in which this action was filed. In addition, the District Court found that Gateway was resident in New York, and the “principal injuries resulting from the alleged conduct” also occurred in New York. Thus, the Court concluded that CAFA’s exception under § 1332(d)(4)(A) applied to the instant case, even if Direct Energy were to remain a defendant.

Similarly, the District Court found that CAFA’s exception under § 1332(d)(4)(B) applied. The District Court found that Gateway was the “primary defendant,” as all of the plaintiffs contracted directly with Gateway, and Gateway was alleged to have made the actionable misrepresentations. Because greater than two-thirds of all proposed plaintiffs and Gateway were citizens of New York, § 1332(d)(4)(B) applied, the District Court had no jurisdiction to hear the action. Accordingly, the District Court granted the defendants’ motions to dismiss.